Should we make Iceland pay up?

The fallout from the collapse of the Icelandic banks continues. The government is sending an emergency task force of accountants (the mind boggles) to help local authorities that are in dire straits. What these financial wizards will do is not clear. Surely the time to consult experts would have been before investing in the Icelandic banks, rather than after losing large sums of money due to their collapse.

Meanwhile, council leaders are demanding an inquiry into the credit rating agencies that gave Icelandic banks a clean bill of health and have met with the Icelandic ambassador to demand compensation from his government for their financial losses. The government, too, is threatening legal action against Iceland unless all the UK depositors are reimbursed.

This is all getting rather silly.

The warnings about Icelandic banks began to sound at least six months ago. While you can forgive individual savers for not keeping their eyes on the financial press, local authorities have finance managers who are supposed to do just that. Councils seem to be frantically looking around for someone else to blame when most of the people who should have prevented this are within their own town halls. Mind you, when the local authority auditor itself ends up losing £10 million, it makes the councils’ finance managers look slightly less stupid.

Many people are getting very xenophobic about how the Icelanders stole our money and saying that the Icelandic government should be forced to give it back.

But there is a question here that, so far, I haven’t heard anyone ask.

The Icelandic banks are, or were, private companies. Each investor, whether an individual, local council or university, had a contract with that private company which it can’t now meet. Is that contract now the responsibility of the government of the country where the bank is based?

Do we really want to establish the principle that the host country of a bank’s head office is responsible for all its liabilities? British banks have subsidiaries all over the world. Take the stricken RBS, for example. It owns Citizens Financial Group, the USA’s eighth largest bank. According to its last annual report, on 31 December 2007 it had $102.2 billion in deposits. If either Citizens Financial Group or RBS itself went bust, which could still happen despite the government’s bail-out, would the British taxpayer have to stump up that $102.2 billion to US savers?

Barclays, Lloyds, HBoS and HSBC all have substantial overseas operations. If any of these banks were to fail, would the British government have to pay off the foreign deposit holders?

That is the implication of making the Icelandic government cover British losses in Icelandic banks.

It is unfortunate that so many people and organisations in the UK have lost money in Icelandic banks. The small savers will get some compensation but the larger ones may have to take their losses on the chin.

Trying to force Iceland to pay up will get us nowhere could set a precedent that we might one day regret.

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3 Responses to Should we make Iceland pay up?

  1. Pingback: Should we make Iceland pay up? « Icelandcrisis’s Blog

  2. Robin Stuart-Kotze says:

    There is no chance of the government of Iceland being made to pay for the debts of banks resident in the country. Whoever is embarking on this is either very stupid (a nicer person might say naive) or has close relatives who are lawyers working on the suit.

    Suing Iceland for the debt of its banks is like suing the US government for the debt of Lehmans or Enron.

  3. Dude says:

    It’s not quite so simple. All of these Icelandic banks and companies have legal ties and fiduciary relationships. No stone will be left unturned in looking for other Icelandic companies with deep pockets with some remote connection with the banks, or with some of the failed loans. It’s going to be messy and take years. Meanwhile no one will be willing to give any Icelandic company access to credit because that company might be taken over by other creditors with even just the slimmest connection. The implications of every company in Iceland having to come up with cash for any and all international transactions is enormous. It essentially puts Iceland back in the dark ages and people will have to carry around loads of money to make import and export transactions.

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